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A big case where bigger's not better
April 11, 2013 - 3:17pm

One of the oft-unspoken norms around here is that economies of scale exist, so bigger is more efficient than smaller.  Another, of course, is that efficiency is a good thing.  But a temporarily overlooked (at least, by sustainability wonks) report out of the Edison Electric Institute seems to say that neither scale nor efficiency is necessarily advantageous.

Titled Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, a white paper published by the national association of electric service companies looks at this continent's electrical distribution infrastructure and the costs of maintaining/enhancing it in the face of a general trend toward "distributed energy resources (DER's)", i.e., small, localized electrical generation equipment including solar panels, wind turbines and micro-hydro facilities.  Even though DER's currently supply only about one percent of national demand for electricity, their popularity is increasing as their prices fall.  And the electrical industry isn't concerned just about DER generating capacity today -- it's concerned (or, at least, its forward thinkers are concerned) about DER capacity 30 years hence, because 30 years is the span across which utilities generally finance infrastructure improvements.  Put another way, somebody's going to be making the final payment 30 years from now on each and every improvement to the electrical grid that gets made this year.

The author's concern, understandably, is who's going to be ready, willing and able to make that 360th mortgage payment (so to speak) not just on infrastructure investments made in 2013, but also in 2018 and 2023 and 2028.  He points out that as DER generation capacity increases, the number of regular customers reliant on grid-supplied electricity will only go down, leaving fewer end-users to pick up the bill for an ever larger, ever older continent-wide distribution network.  The institutional investors who typically buy utility bonds (generally some of the most conservative, reliable investments available short of government securities) aren't worrying about utility companies' ability to meet their obligations three decades hence.  At least, they're not worrying yet.  After all, institutional investors are typically looking only 12-24 months into the future, and the next year or two doesn't seem particularly troubling.  But at some point, investors are going to cotton on to the fact that utility market share will be dropping, utility revenues will be reduced or at least strained, and there will be "potential for a squeeze on profitability and, thus, credit ratings."  All of this, logically seems likely to lead to a situation where "the future cost and availability of capital for the electric utility industry would be adversely impacted."  And you can't run a big utility company without capital.

The nub of the problem for utilities is the rapid rate of change (especially, price change) in alternative generation technologies.  It can make sense to install equipment that will take 30 years to pay for, but only if you expect to be able to use it for 30 or more years.  In 1950, that was the case.  In 1975 and 2000, still probably true.  As 2025 approaches . . . who knows?  In a stable technological environment and a stable (or reliably growing) market, big investments that pay off with increased efficiency can make perfect sense.  But it makes far less sense if the market's not reliable in the long term.  And even further less sense if the reason for the lack of reliability is the specter of technological change.  After all, who cares about the nominal efficiency of some piece of infrastructure that produces a service for which there's no demand?  And who wants big, lumbering, slow-to-react infrastructure in a highly volatile demand situation?

Put it this way -- if efficiency were all, your inter-city transportation and mine would be high-speed rail.  Railroad trains have always been more mechanically efficient than automobiles and planes.  But cars are much, much more flexible -- you can go wherever you want, whenever you want.  And planes are much, much (at least, on this continent) faster.  Flexibility and speed trump efficiency in a market where individual demand for transportation changes daily.

Big, honking centralized electrical generation capacity which distributes power across a big, honking continental grid is efficient in the same way that railroads are efficient.  And there's nothing inherently wrong with that.  (Hell, I'm a big fan of inter-city high-speed rail as one way to attract folks back into livable cities.)  But distributed energy resources -- home-scale solar panels, farm-scale wind turbines, neighborhood- and town- and city-scale distribution networks interconnected for purposes of load-balancing and emergency (not day-to-day) supply -- are like cars.  Done right, they can be like bicycles -- both flexible (within an appropriate range) and efficient.  Call it "resilient".  Call it "viable in the long term".

No wonder the electric utility industry is starting to worry.  The way things are going, a number of other big, honking centralized/globally integrated industries may follow suit.  One can only hope.


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